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China’s Intellectual Property Challenge

Business, China, Company Strategy, Economics, Environment, Sustainability, Technology
By John Richardson on 08-Nov-2012


Wen Jiabao – stepping down

Source of picture: KeystoneUSA-ZUMA/Rex Features 


In the last of our series of posts on China’s leadership handover, which begins today as the 18th Party Congress meets, we look at intellectua property rights protection.  

By John Richardson

WHY bother innovating in China when a state-owned, or state-backed, company is able to steal your innovative technologies and set up next door with access to low-cost finance and friendly judges who will keep the law on their side?

This is the question being asked by a growing number of private-sector entrepreneurs in China, who, according to a chemicals industry executive, are “voting with their feet by leaving China with their money and their families”.

This is one of the reasons, why, according to the New York Times, the middle classes are leaving China in record numbers.

“In 2010, the last year for which complete statistics are available, 508,000 Chinese left for the 34 developed countries that make up the Organization for Economic Cooperation and Development. That is a 45% increase over 2000,” writes the newspaper.

For foreign investors, the long-standing issue of poor intellectual property rights protection was perhaps less of a concern when China was moving in a clear economic direction. OK, you might, as speciality chemicals producer, lose the odd process or product that might be about to move off-patent anyway, but if growth was roaring ahead, you would benefit overall.

But now, with China entering an extended period of what we believe will be 5-7%, or even lower, GDP growth per year, the risk/reward ratio has shifted.

Plus, as China tries to escape the “middle-income trap”, the desire of state-owned enterprises (SOEs) to acquire overseas expertise has surely increased. Both the EU Chamber of Commerce and the American Chamber of Commerce recently released reports that complain about intellectual property theft and inadequate market access.

Will the new leadership be willing or able to reform the legal system?

And will they be willing or able to tackle the other problems we have outlined this week, and many other difficulties that we haven’t addressed, including environmental degradation – the result of over-investment in industrial capacity and infrastructure?

Pollution is another factor behind the migration of the middle classes, according to the NYT article we linked to above.

The risk of failure has to be built into every range of estimates for chemicals demand growth over the next decade when the new leaders are in office, and into every company’s strategic options.

As the consultancy, Stratfor, warns – and this goes to the very heart of the matter: “China’s new leaders will inherit a political system that is, in many ways, structurally incapable of changing itself.”